Credit Risk Analyzer 

Purpose

This TRM component enables you to measure, analyze, and control default risks. Default risk refers to the potential loss arising from a financial transaction should the business partner not fulfill his contractual obligations either due to specific, economic or political reasons. Default risks are classified as follows:

Counterparty/issuer risk describes the danger of a loss in the value of a receivable due to a worsening of the creditworthiness of the business partner. Country risks arise when either the country of the business partner or the country of the transaction currency becomes insolvent. Counterparty/issuer risks are subdivided into credit risk and settlement risk. The existence of both these risks depends on the timing of the analysis of the transactions. Credit risks exist over the whole term of the transactions. Settlement risks exist only during the settlement period. Credit risk can consist in a pure counterparty risk or an issuer risk, depending on the transaction category (for example, securities transactions).

The functions for country risk were developed only as part of a project solution and have not been released for the market. The relevant functions are referred to in the documentation.

Implementation Considerations

The tightening of regulations on risk controlling endorses the increasing significance of analyzing and limiting insolvency risks. Out of commercial considerations too it is essential to have a system that supports the measurement, analysis, control and limitation of counterparty/issuer risks.

Features

Attributable Amount Determination - Market-Based Quantification of Various Exposures

The system calculates attributable amounts for each single transaction entered, showing the risk content of the respective transaction. Credit and settlement risks from classic credit transactions and trading book transactions are taken into account when quantifying default risk. Default risk is calculated based on counterparties and issuers.

The level of the default risk arising from classic credit transactions is determined by the amount of the capital commitment of the contract and the current drawings.

In the case of trading transactions, the level of the default risk is governed by the potential replacement cost that would arise in the case of default by a business partner. The potential additional loss from a potential positive market value change of an existing transaction can be covered by transaction-specific markup rates.

The calculated risks are assigned to all affected portfolio segments, for example, the counterparty, the industry sector, the product, or a combination of these.

Limit Management – Controlling Risk by Setting up and Monitoring Limits

Different limits are stored in central limit management. These can relate to one or more criteria (Limit Characteristics). Limits reflect the organization’s allocations.

Updating Limits and Comparing Attributable Amounts with Limits

The integrated default risk limit check assesses the risk of each single transaction at the time the transaction is created in TRM Transaction Manager. Each transaction is checked against the relevant limits and updated. You can also let the system update limit utilizations by revaluing all items in end-of-day processing. For risk control purposes, the relevant limit utilizations are shown in aggregated form.

Additional Notes

You can find the functions of Credit Risk Analyzer in the application by choosing Accounting ® Financial Supply Chain Management ® Treasury and Risk Management ® Credit Risk Analyzer.

All subsequent menu paths contained in the documentation for Credit Risk Analyzer start from this point.

You can find the relevant settings in Customizing under Financial Supply Chain Management ® Treasury and Risk Management ® Credit Risk Analyzer.

The integrated default risk limit check is to be understood as an integrated single transaction check. Therefore, information provided for the single transaction check in sections of the documentation not specifically referring to the single transaction check (for example updating limit utilizations), applies also for the integrated default risk limit check.